By Jane Meacham
Many employers match a percentage of employees’ contributions to their retirement funds. But what impact does that match have? A new academic study found that participation and contributions in U.S. employer-sponsored retirement plans increase when a matching contribution is offered but that the match’s impact on savings is less significant than other factors such as the match threshold.
The report, “Matching Contributions and Savings Outcomes: A Behavioral Economics Perspective,” is based on research conducted at Harvard University’s John F. Kennedy School of Government for the National Bureau of Economic Research in Cambridge, Mass.
The study said automatic enrollment, simplified enrollment steps, planning aids and reminders could have a much greater effect on retirement savings outcomes than the presence of a company match — often at a much lower cost to employers.
It determined that the threshold for employees to begin receiving an employer match holds more sway than the amount of the match, because the threshold serves as a natural reference point when individuals are deciding how much to save. It also may be interpreted as advice from the program sponsor on how much to save. The report said that a higher employer match has only a small effect on levels of employee retirement savings contributions.
In fact, a lower match rate paired with a higher match threshold may be the best way to lift employee contributions, the study theorizes. For example, providing a 25-percent match on contributions up to 10 percent of pay will induce individuals to save more than a 50-percent match of up to 5 percent of pay, and the first model would cost the plan sponsor less.
The NBER report echoed studies that suggest many psychological impediments stand in the way of the best-laid plans to save. “Financial incentives do little in the face of such barriers,” it says. “A more effective strategy is to directly address the barriers themselves.” It concludes that countering these psychological obstacles can lead to rises in savings plan participation and asset accumulation that surpass the effects of an organization’s typical matching contribution alone.